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Tuesday, June 26, 2012

Market outlook for fy13 and fy14/Best time to buy equities/Sensex&Nifty PE and earnings/Buy on fear and sell on greed/bull and bear market traits

Buy low, sell high is the ideal investor maxim. So is the current bear market low enough to take a medium-term risk on equity?If you were to ask Prashant Jain, CIO and executive director of HDFC Mutual Fund, the answer is yes. The core of his argument is that investors have always made handsome returns whenever they've invested in a market at a forward price-earnings (P/E) multiple of 10-11 times.Quotes history to make his point. Investors who bought shares in September 2001 (immediately after the 9/11 attacks), June 2004 (after BJP's unexpected loss in the general elections) and November 2008 (in the aftermath of the global financial crisis) made 60-90 percent returns over the next three years.

Here are excerpts from Prashant Jain's note:

"The values of the listed businesses as indicated by the Sensex are down by 20 percent between 2008-2012. This is despite a nearly 60 percent growth in the GDP (15 percent CAGR) and, therefore, a similar growth in the fair values of businesses over the same time. Consequently, one year forward P/E multiples have come down sharply from over 20 times in FY08 to below 13 times presently. These are nearly 20 percent below the long term averages.Further, the P/E of the Sensex based on FY14 (estimated) EPS of Rs 1,475 is nearly 11 times, which is close to the lowest multiples that Indian markets have traded at in the past.It is true that the economy is currently battling twin deficits, but that is known to the markets. What will determine markets of tomorrow are the deficits of tomorrow and expectations thereof, both of which the chances will be better and not worse than today.Times such as (the) present, when the markets are not doing well, should actually be looked upon as a window of opportunity for savers to invest more into equities, so that when the good times come, there are meaningful investments in equities to reap the benefits from.The lower the markets are, the bigger is the opportunity; and the longer the markets remain depressed, the better is the opportunity for savers. In a lifespan of investing of say 30-40 years, it is unlikely that the markets will provide many such windows. In the last 20 years there have been only three or four such windows.

My views:I fully corroborate his views.In my stock market career of 11 years have witnessed such equity aversion among investors only once.In my early days or in 2002-03, I recollect it was kind of same,ditto stuff.Quality stocks were treated as bankrupt papers.We all know what followed next-Sensex moved all the way from 3000 to 21200 in a span of just 5 years.People made 10-20-30x in stocks.Similar is the condition now.There's just too much of pessimism surrounding the markets.Its been already around 4 and a half years where we are down by over 4000 points from the peak.The dullness can surely continue for some more quarters but then what next?Its ought to move northward folks.Markets would always ridicule the majority and would move on its own.My mantra would be simple.Be greedy when others are fearful and be fearful when others turn greedy.Buy now and make a huge sum of money in the next 4-5 years.

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